Buying euros is one of the easiest ways to invest in the eurozone. These nations all use the euro as a common currency. When Europe does well economically, the value of the currency increases compared to other currencies.
If an investor can predict a bull market in the eurozone, they can purchase euros or a fund that contains euros or euro derivatives. These holdings are likely to increase in value in the short term.
Professional investors do not usually think of foreign currencies as long-term investments. Currency values fluctuate over time.
Furthermore, investors have to deal with pairs. They need to weigh not only how the currency performs but also its value relative to the other currency. For U.S.-based investors, the U.S. dollar is typically the other currency in a pair. This pair gets written as EUR/USD.
In the long term, investors could hold euros, but they would need to use stocks, funds, or other futures to hedge against unfavorable price movements.
Investing in euros is an easy way for you to access European markets. However, as you can see, you need to understand the nuances of forex investments to profit from the euro.
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The Forex Market
The foreign exchange market, usually shortened to the “forex market,” is a worldwide exchange for the buying and selling of currencies. The forex market operates 24 hours per day during the weekdays.
Investors access the forex market through a broker. The broker often allows the investor to use leverage to increase the size of their investment. In other words, the investor borrows money from the broker to increase the size of their position. However, they are then liable for the money that they borrow.
When you invest through the forex market, you trade currency pairs. For example, when you buy euros, you sell U.S. dollars using the EUR/USD pair. Then, when you want to sell your euros, you will purchase dollars again.
You can also trade other currencies, such as British pounds. The currency pair involving the euro is EUR/GBP. EUR/JPY, which contains the euro and the Japanese yen, is another popular euro-based pair.
Options for Euro Investment
You can invest directly in euros by purchasing them on the forex market. You can also use currency-related stocks, funds, or derivatives. Investing in currencies like the euro is often a piece of a balanced investment portfolio.
- You may choose to purchase euros directly on the forex market because of positive economic news or forecasts for Europe. If you are trading the EUR/USD pair, you expect the euro to increase in value relative to the dollar. This type of trade is simple to execute through a forex broker.The currency market is very volatile, so even if the euro increases in value relative to the dollar, the increase may not last. The volatility also means that this strategy is not ideal for long-term investing.
- Another strategy for investing via the forex market involves taking advantage of different interest rates. In general, interest rates in Europe are higher than in the U.S. You can purchase euros as a way to take advantage of these interest rates.
Rather than holding your euros, you can use them to buy bonds in Europe to take advantage of the higher interest rates. However, the European or U.S. central bank could change interest rates, which would make this type of investment less profitable. Also, small investors may find it challenging to access European bond markets.
- Currency futures offer a way to speculate on the future price of the euro relative to the dollar. You can also use futures to hedge against short-term fluctuations. Some markets, such as the Chicago Mercantile Exchange (CME), have mini-sized futures that small investors can afford to speculate on without risking too much of their money.
Also, futures prices include factors such as interest rates, so they fluctuate less violently than the underlying currency. The disadvantage of futures contracts is that they are less liquid than the forex cash market. Also, fewer brokers offer futures trading, and fees can be more expensive than forex market fees.
Buying Euros With ETFs
One of the easiest ways for small investors to invest in the euro is to purchase an exchange-traded fund, which usually gets abbreviated as “ETF.”
You can purchase these funds through your regular stockbroker. You buy an ETF on a stock exchange, just like you would buy a regular stock.
With a euro-based ETF, you can still stand to gain when the value of the euro increases versus another currency, such as the U.S. dollar. Many brokers do not charge trading fees for stocks and ETFs. Furthermore, you do not have to deal with issues like excessive volatility and leverage that create challenges for traders in forex cash markets.
Another advantage of ETFs is that they include different instruments. For example, a fund could consist of euro cash deposits, futures, bonds, or other debt instruments.
The main drawback of exchange-traded funds is that investors have to pay an expense ratio, which is a fee that the issuers of the ETF take to cover management expenses. According to the Wall Street Journal, the average expense ratio is 0.44%. This percentage means that you would pay $4.40 per year in fees for every $1000 invested.
Benefits of Investing in Foreign Currency
Investing in the euro is an excellent way to gain exposure to European markets. When economic forecasts are positive, you can purchase euros to gain access to the bull market. You can also hold euros for a short period when you expect good financial news out of Europe.
On forex cash markets, you can use leverage to increase your investment and profits. Using leverage comes with risks, but you can also significantly increase your earnings if you manage your position correctly.
Currencies generally rise and fall in value based on economic conditions. If you purchase shares of a company’s stock, there could be internal factors that cause changes. There is a level playing field with forex; no insiders are getting information about a company before everyone else.
Also, you can easily play both sides of a currency pair. For example, if there is a political or economic event in Europe, you could keep your cash in USD. Once you feel that conditions are improving on the continent, you can quickly put your money back in euros. In this situation, you will have earned an initial profit because the dollar increased in value compared to the euro. Then, you may make additional profits because you were able to buy the euro at a low price
Risks of Investing in Foreign Currency
The most significant risk of investing directly in a foreign currency is volatility. The price of euros, for example, will fluctuate. Sometimes, this drop will coincide with widely reported news or financial reports. At other times, the decline could come from an unexpected event and be impossible to foresee.
If you buy euros through a forex market, you will have to invest large amounts of money to take advantage of price increases, or you will have to use leverage, which will increase your risk of significant losses.
Volatility comes from specific economic events and announcements. You need to pay attention to these events if you purchase euros on a forex market or get euro-based ETFs or currency futures. An example of such an event would be a change in interest rates by the European Central Bank (ECB).
You can make significant profits by investing in euros. However, this currency is not an investment for passive investors. You have to continually research economic conditions and manage your positions to ensure profits and limit risk.
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